Analysis: Will KY Gaming Plan Muddy Waters?

Kentucky’s horse racing and breeding industry plans to stand its ground in the wake of a proposal for a constitutional amendment on gaming some have characterized as a politically-motivated stall tactic.

The proposal, announced Oct. 20 by Republican Sen. Damon Thayer, gives the horse industry a larger percentage of gaming revenue, racetracks much less revenue, and seeks to “guarantee” the proceeds via a November 2010 ballot measure that would alter the state constitution.

Horse industry representatives believe the scheme is unworkable and unnecessary, as well as a political ploy. Republicans, who earlier this year collectively defeated legislation to authorize video lottery terminals at racetracks, are attempting to divide the industry, they said.

Republican Senate Leader David Williams this year said racetrack owners would get too much of the revenue from the bill that failed to pass a Senate committee even though horsemen lodged no complaints publicly. He also hastily put together a counterproposal to raise revenue for purses and breed development by taxing horseplayers and those who purchase lottery tickets.

Now, the Republicans have presented the first proposal for 2010. If the horse industry balks, it could be blamed for being obstructive in the same manner it accused Republicans earlier in 2009.

“I think it’s a reasonable explanation (as to why the plan was floated),” Turfway Park president Bob Elliston said. “I haven’t seen the details of it yet, but this appears to be politics. The last two attorneys general and (Williams) have said (racetrack VLTs) don’t require a vote of the people.

“We believe the support exists to pass it statutorily. The horse industry is unified like never before. I really believe we are in lockstep on this.”

Why the constitutional amendment?

Thayer, who has fallen out of favor with some horse industry representatives, said his proposal is sincere and follows through on his longtime position that racetrack gaming should be decided by constitutional amendment. He noted the Kentucky Equine Education Project backed a public vote a few years ago, and Democratic Gov. Steve Beshear campaigned on that plan.

“What I’m for is a constitutional amendment,” Thayer said. “The best way to be for something is to go all the way and sponsor the bill. After seven years of spearheading every piece of horse industry legislation, you’d think (the industry) would give me the benefit of the doubt and not question my motivation.

“It’s interesting those who have been very political criticize someone else for being political. I’m doing this with pure intentions. I’m a politician, and I’m a Republican, and I’m going to support Republicans in every election I’m involved in next year.”

Williams, perhaps looking for political cover or to muddy the waters, announced a plan to introduce a constitutional amendment that would ban any gambling expansion without a statewide referendum. He unveiled it the same day Thayer presented his proposal to Kentucky breeders and owners.

Thayer said he and Williams disagree on whether racetrack gaming should be done through a constitutional amendment. Horse industry observers, however, believe Thayer, Williams, and other Republicans have the same agenda on the gaming issue.

Revenue splits an issue

It’s widely believed in gaming circles the 25% cut in Thayer’s proposal is too low for track operators that must build VLT facilities and purchase gaming machines. Under the bill offered by Democratic House Speaker Greg Stumbo earlier this year, tracks would have gotten 45%-50% of VLT revenue.

“A return of just 25% to any VLT operator, be that a Kentucky racetrack or any other operator, is not enough to provide a competitive facility or would offer little hope of even a small return to the track or operator,” Churchill Downs vice president of communications John Asher said. “Providing a facility that offers amenities that are least equal to those of competing casinos in nearby states would be critical to the success of any Kentucky VLT operation, and a return of 25% to the operator probably would not cover operating expense—much less the construction of a competitive facility and the purchase of state-of-the-art machines.

“Those opposing expanded wagering at Kentucky tracks like to portray any return to the VLT operator as ‘profit’ for the tracks. That is not the case and never has been. The start-up and operating expenses for these facilities is significant if the operator hopes to maximize revenue potential for the state and the horse industry. To portray that number as pure profit to racetracks or any other operator is disingenuous, at best.”

Elliston said he takes exception with earlier claims by Williams and others that track operators would receive too large a share of revenue. He said after paying hefty licensing fees, operators would have to build quality facilities and maintain them to keep them competitive.

With a 25% cut, “there’s no possible way to get financing” to develop a VLT casino, Elliston said. “The racetracks’ remaining portion of the revenue is the least of the three partners—the state, horsemen, and the tracks—but we would take all the risk. All of the other money would come right off the top.”

Thayer said the horse industry has repeatedly said it needs revenue for purses and breed development, so his proposal calls for a guaranteed $100 million or 25% of VLT revenue, whichever is higher, each year for horsemen.

“I think my bill starts in a very good place,” Thayer said. “My proposal is not a racetrack-enrichment bill. If racetracks want to sit down (and discuss the revenue splits), I will. I’m not going to favor the kind of splits in the slots-by-statute bill from earlier this year, but that doesn’t mean it’s the end of the conversation.”

Horsemen in Kentucky—and most other states—haven’t complained about the racetracks’ share of gaming revenue as long as their portion—10%-12% on average—is what they consider fair. The problems have developed after racetrack slots are implemented and horsemen and patrons perceive a lack of effort and reluctance to spend capital to help grow the racing side; lawmakers are blamed for not following through on the intent of such legislation.

Thayer’s proposal also calls for local-option votes on VLT parlors, and a competitive-bidding process would open it up to non-racing entities. The 25% share to operators, plus licensing fees, could discourage out-of-state interest, but on its face, the referendum process invites the type of free-spending lobbying by casino interests Republicans have warned against in previous gaming discussions.

Ohio, last year and this year, is evidence of such spending and attempts to influence public opinion.

Thayer said Kentuckians have been critical of plans to give racetracks a gaming monopoly. He also said legislators have a responsibility to get the highest price for licenses.

“These licenses can be very valuable,” Thayer said, “and they will have more worth if there is competitive bidding.”

Thayer, who never has supported anything other than a constitutional amendment on gaming, argues it’s the only way to protect the horse industry’s interests. He noted legislatures in three states in which racetrack gaming was approved statutorily—Delaware, Kentucky, and West Virginia—have reduced revenue to racing to support other state programs or close budget deficits.

Horse industry wants action now

The horse industry claims Thayer’s proposal is too little, too late and could be an attempt to at the very least confuse the issue and delay action before the November 2010 election, when legislative seats are up for grabs.

Elliston said assistance is needed "now," not two or three years from now. Others agree.

“Churchill Downs and Kentucky’s horse industry have supported the constitutional amendment approach as recently as a couple of years ago, but the world has significantly changed since then,” Asher said. “Indiana has come on line with casinos at tracks, Pennsylvania has emerged as a major threat in areas of both racing and breeding, and Ohio appears set to approve some form of expanded gaming in near future.

“Because of those changes, Kentucky’s horse industry does not have time to wait for more than a year for a constitutional amendment to be put on the ballot. We need to be put on a level competitive playing field immediately, and the statutory approach will accomplish that. If our elected officials are serious about helping the horse industry, they would agree to immediately pass that legislation rather than commit to a lengthy amendment process.

“If we are not permitted to compete on a level playing field, our signature industry will continue to migrate out of Kentucky. Our state depends on a healthy horse industry economy, and without immediate action, thousands of jobs could be lost and our overall economy will suffer dramatically.

“We are confident that we would win a ballot initiative, but our signature industry simply cannot wait for more than a year to even find out whether we will have the opportunity to compete on that level group, much less attempt to make up any of the ground that our industry is losing each day to those competing states that benefit from Kentucky’s continued lack of action.”

Thayer said Williams told horsemen he and others are willing to devise a “short-term” solution for purses that could take effect July 1, 2010. Thayer wouldn’t discuss details but mentioned previously-discussed options such as a tax on account wagering, an increase in the lottery surcharge, and/or reassigning some or all of the about $45 million a year the horse industry pays in various taxes.